$35.1 Million for Instapundit.com

With all this interest in social networking sites around, and creative new private equity concepts in general, it's about that time in history again when leaving your prestigious investment banking job to go and start a private equity venture capital or buy-out fund focusing on overlooked online assets doesn't seem like such a bad idea if you have the contacts and a bit of chutzpah.

On top of that list of overlooked online assets are perhaps the big blogs. With increasing numbers of readers who demonstrate great brand loyalty, clicking on hundreds of links a day and even taking time out to blog on their own smaller platforms what the 'A-listers' have to say and offer up, the big blogs offer some lucrative potential cross-promotion and marketing concepts. Plus, as an increasingly sizeable number of readers turn to the big blogs for political news before any other source, the potential for search can even be expolited down the road. That's a whole pile of growth. And at considerably less risk, one could argue than other newer social networking sites offer too; most big blogs like Glenn Reynold's Instapundit have been around for at least five years - middle age by online standards, especially in light of My Space, You Tube, Facebook and the rest which haven't even tested their brand stickiness for half that time.

With this in mind, I e-mailed Glenn Reynolds earlier today, asking him how much he'd be willing to let his blog go for, either including or excluding him in the package. "I dunno," he replied. "Make me an offer! Er, a big one ..." Well, after some valuation calcs, it appears the law professor is right to ask for piles of cash, and this indeed is exactly what he may well find himself with in the next couple of years.

There are several ways to calculate the value of Instapundit, but the most accurate one would be based on growth versus current private market value for similar sites offering the same growth features. There's the traditional link-based blog calculator, which puts Instapundit at just under three and half million dollars, but there's a lot wrong with this. Principally, it's based on a formula developed from the AOL-Weblogs Inc. deal several years ago, when the private market for new online tech wasn't nearly so bullish. It's also based on links and their individual component values, but we now know that VC's are less interested in links and current ad revenues than they are in potential market share maximisation (You Tube has very little outside links and doesn't make any money at all).

Let's start with the News Corp-MySpace deal, then. Earlier this year News Corp paid $580 million for My Space, which then had a core subscriber base of around 18.5 million. That's a value of about $31 a head per subscriber, based on forward growth so far of about 25%, meaning News Corp's My Space nominal valuation model peaks at just under $40 per subscriber. Based on those figures, let's assume that Instapundit's average CORE daily readership are the subscribers, which is about 150,000. That's a valuation for Instapundit of $5.87 million. But this figure doesn't take into account the fact that that deal created a wave of private equity deals for online subscriber bases which led to an instant industry growth in valuation of about 250%. Basically, that's what you could have bought Instapundit for just right after the News Corp/MySpace deal. In a minute you'll wish you had.

Next to follow suit was Facebook, for which a private venture capital firm paid for 25% of the company on a valuation of $550 million for a subscriber base of only 7 million. That put the price of subscribers at $78 a head (and in all honesty, Facebook's subscribers probably had less than that in their bank accounts); for Instapundit, that means a valuation of $11 million. Using the Viacom's previously outright rejected offer price of $750 million, Instapundit's value rockets to $16 million.

But then Google got in on the act and paid $1.65 billion for YouTube. Here is a company that hasn't even turned a profit yet, and has less than 10 million subscribers so far. So that's $165 per subscriber, or a value for Instapundit of $24.7 million. Using these recent deals as the basis for blog calculations are sensible: blogs are interactive, they are essentially 'hang-outs' for online communities, and could certainly be developed that way if the owners wanted them to be. Plus, Instapundit's subscriber base is considerably more sophisticated and wealthy than any of the above social networking sites, which means more demand for search and higher margins on subscribers.

Now, Instapundit has an annual subscriber growth of 50%, and valuation growth for online sites is about 100% excluding the YouTube deal. Using those stats alone, we can estimate Instapundit's readership to reach a conservative 225,000 average in the next 18 months, at an industry average of growth to $156 a head (and what's more, the average Instapundit reader has considerably more than that in his/her bank account meaning plenty of ad/cross promotion bucks and elite education which is good for search habits). That puts Instapundit at a current valuation of $35.1 million.

Assuming Glenn Reynolds stays for another five years (as is the case with most PE buy-outs), that's not bad at all for ten year's work.

*UPDATE* Welcome back Instapundit readers who came by for the recent Dow and NASDAQ (links are to posts) analysis last week, and welcome to those who have never visited here before! This is a blog about the economy, which is really to say it's about everything from politics to the arts to technology too, because that's really the jist of the economy. There's also a greater analytical scope on markets here than you'll find in most places. As always, please feel free to take a look around, comment and of course, come back.

**UPDATE** For some good election news and opinions, go and see Brian over at Iowa Voice.

Comments

[Bob Buchanan]

There is one flaw ... while Instapundit is great, I read it several times per day, it is not a community. In Facebook and Myspace there is a community since many people can add to an individual's site. If Glenn were to encourage comments and somehow structure real dialog among participants then the $35mil would make sense.

Bob

[Daniel M. Harrison]

Bob, I was wondering when someone was going to bring this up. So thanks.

That's partly right - Instapundit is right now somewhere between an online paper and a Facebook (people do the hanging out at each others blogs but still link to him making him the primary source for cross-promotion/ad-revenue), but from a VC point of view it doesn't really matter: they could engineer more interactivity should they want to, and anyway, it's the core subscribers they're after.

The point is, both Instapundit and Facebook/My Space etc. are value networks, meaning their ultimate operational value configuration is the same so you can apply the same financial valuation methods here. It's like Google - people don' stay long on the search engine itself but there's always a core band which keepsgrowing and keeps coming back.

[Matthew]

Instapundit.com is Glenn Reynolds. Buy him out and you own the web address and a pretty plain looking web site. With out Glenn Reynolds making the posts daily you have very little.

[Daniel M. Harrison]

Matthew - again, a good point, but it misses the value angle. What you want to do is slowly convert the site to optimise interactivity - by putting features like a forum page or two - and a search facility so people who search for "mid terms 2006" for example can bring up all they want from Instapundit. You can link this search facility with a major providor and cross-share margins/revenues.

While you are slowly tweaking this site you will of course want Glenn blogging every day just as he does now, but as the site becomes more user oriented, Glenn's presence will be able to take a back seat. Particularly as with the cash injection you can go out and hire a whole band of enormous writers. You can cross-promote new book deals for example with writers like John Grisham writing on the site during that period (remember Glenn made his own obscure tech book a bestseller just through the blog).

Cross-promoting and attracting those search revenues will give you back AT LEAST the $35.1 million in market value you paid for the site. Most likely a lot more.

[Hank]

Instapundit is Glenn...but I could do that just as well.

I mean, how hard could it be to scan for items to link to and then add the obligatory HEH infront of each item?

[Melissa]

What I see happening, and if someone were smart they'd do this, is Glenn receiving a huge corporate sponsor ala Football Stadiums.

Instead of Instapundit, his site would be Instapundit brought to you by your friendly Whataburger. Or Chevrolet. Or, doesn't he drive a hybrid of some sort? Anyway, you get the idea.

He would be like an on-line spokesmodel. A couple times a year he'd make a pithy remark about said sponsor, there would be discrete product placement (vlogging from inside his sponsor's vehicle, say)and he would be rich. He could retire from being a venerable Law Prof and blog 'til his eyeballs fall out of his head.

35 million seems a tad much--how about 1 million for exclusive Glenn for a year or two?

[Daniel M. Harrison]

Hank - How hard can it be to make paper cocktail umbrellas or start a site where people can upload videos and personal pictures or even make a hamburger?

All of those activities have created billionaires. It's often the really simple stuff that pays off BIG TIME. Part of it is trademark differentiation - as you correctly point out, Glenn always puts 'heh' (even on really serious topics) which kind of sticks in your mind and makes you come back - and part of it is first mover advantage.

Melissa - Agree with you about sponsorship deals, though they don't START at less that $5 million, so it's likely to be a lot more than $1 million. Also, what I'm showing is the MARKET PRICE for Instapundit, and market price unfortunately dictates value. I think eight dollars is a bit steep for 20 Marlboros, but it's market price (at least in NYC).

[Rex]

I'm sure Glenn doesn't want anyone discouraging this idea, but "slowly converting the site to optimize interactivity" and gradually letting Glenn take a back seat sounds like a great way to wean me off Instapundit. I don't much visit on-line magazines or group blogs. I visit favorite bloggers for the same reason I read favorite writers. Let's say I like reading Stephen King - if you slowly convert King's novels to optimize interactivity and let Steve take a back seat to other contributors, I'm out of there. I just can't help feeling that you're missing the point. (Sorry, Glenn.)

[JimboNC]

I'm on Instapundit at least four times a day, Make it my first stop after logging on. But a forum would kill it for many because posts quickly deteriorate into arguements which no one likes. The first few stick to the subject and it falls away into name-calling.

Instapundit got a big boost in readership in August 2004 when Time.com posted an article about blogs and recommended Instapundit as the place to start for newbies, that's how I started reading Glenn's HEHs.

[Jake]

It might be interesting to keep an eye on both Powerline and LGF - Instapundit like blogs that are doing more in the way of creating community features. Powerline recently set up a forum along with enhanced news and video. LGF is experimenting with new community features, has a very loyal (and branded) community of users, and is one of the only blogs in this space that seems to be promoting community value by limiting access.

[Greg Smith]

I must say a corporate takeover of instapundit sounds like a good way to ruin it. If it was a case of someone else owning it but still "allowing" Glenn to post as he sees fit, it MIGHT work for a little while. But how long until there is a conflict of interest between Glenn and the parent company? And then *pow* no more Instapundit as we know it.

So my advice to Glenn is - if you sell out - make sure it's in your contract that you can still go blog on a new website! Who cares (too much) about the name?